When making a decision, we tend to look at absolute costs: the time or money required for the choice we are evaluating. But absolute costs can skew our thinking, causing us to discard options which provide great value and consider options with lesser value.
Relative costs allow us to examine the added value between options and give us an estimate of the amount of time or money at risk when making a decision.
When evaluating multiple options, consider the cost difference in time or money between one option and another.
For instance, if buying a new car results in a monthly payment of $300 per month, but keeping up with repairs on your current car costs $200 per month, the relative cost between the two options is $100.
Use the relative cost to evaluate the added value of the more expensive option.
For instance, a new car might give you better gas mileage, less time off work dealing with repairs, increased safety or reduced stress. The added value of these benefits doesn’t have to justify the $300 per month, but rather then $100 per month relative cost. The other $200 per month will be spent no matter what option you choose.
If the added value of an option exceeds its relative cost, it’s often a better option.
Two caveats to using relative costs:
- Don’t rely on relative costs when choosing whether to make the decision.
If one option is to not choose any of the options, such as during an optional purchase decision, then don’t use relative costs for the “no purchase” option. Look instead at the absolute cost, since that’s what you’ll save if you choose not to select an option.
- Relying too much on relative costs can cause you to upgrade needlessly.
When choosing the higher priced option, make sure it adds value to you. What gives added value to one person may needlessly drive up the cost for another. Don’t supersize just because the cost difference is low, supersize because you actually need the larger size.
How do you use relative costs in your decisions?